- 1 - Impact of FTAs on Canadian Auto Industry Johannes Van Biesebroeck, Hang Gao and Frank Verboven January 31, 2012 Prepared for DFAIT Canada Executive Summary ........................................................................................................ - 2 - 1 Introduction ............................................................................................................. - 3 - 2 Trends in the automotive industry .......................................................................... - 5 - 2.1 Canadian sales and production........................................................................ - 5 - 2.2 Major trends in the industry ............................................................................ - 7 - 3 Effects of eliminating preferential tariffs under Canada’s trade agreements ....... - 11 - 3.1 The nature of the counterfactual analysis ..................................................... - 11 - 3.2 Data set.......................................................................................................... - 13 - 3.3 Demand estimation ....................................................................................... - 15 - 3.4 Counterfactual simulation ............................................................................. - 21 - 3.5 Effects for different trade agreements........................................................... - 23 - 3.5.1 European Union ........................................................................................ - 26 - 3.5.2 South Korea .............................................................................................. - 29 - 3.5.3 Japan ......................................................................................................... - 29 - 3.5.4 Simultaneous FTAs with several trading partners .................................... - 30 - 3.5.5 Effects of FTAs on tariff revenue, consumer surplus, and prices ............. - 31 - 4 Effect of Korea-U.S. FTA on the Canadian auto industry.................................... - 34 - 5 Impact of tariff elimination on auto assembly plant investment in Canada ......... - 37 - 6 Conclusions ........................................................................................................... - 41 - References ..................................................................................................................... - 43 -